Thursday, September 30, 2010
Buyers who have already declared their interest include Mapletree Investments, the real estate arm of Singapore’s state investor Temasek Holdings, American private equity firms Blackstone Group and Fortress, and Germany’s Deutsche Bank.
The Japan real estate market is also gaining interest from wealthy Chinese investors and a number of travel agencies have started offering ‘Buy Japanese Property’ tours.
Nikkei Real Estate Market recorded 288 cases of sales during the
period from January through March 2010, representing a year on-
year gain of 13% and a sign that the market is recovering. The
demand is being pulled by major J-REITs that have switched to
the offensive with the improved capital raising environment. The
REITs are in fact rebuilding their portfolios, with their more than
150 billion yen [$1.6 billion] in acquisitions offset by 90 billion
yen [$960 million] in sales. The residential market is seeing more
transaction activity, including condominium sites and mid-development
The trend of a recovery in the REIT market has
become clear with the improvement in the capital
raising environment. Figure 1 shows the history of
transaction amounts for REITs by quarter, and the
trend of capital raising through REIT public offerings
by quarter is indicated in Figure 2. There were 34
acquisitions between January and March 2010 for a
total of 159.1 billion yen [$1.7 billion]. Although this
is far less than previous levels, it is the second straight
quarter following the period from October through
December 2009 in which 150 billion yen [$1.6 billion]
has been exceeded. Although the deal is not shown in
the figure, in April Mori Trust Sogo REIT acquired
50% joint ownership in the Tokyo Shiodome Building
for 110 billion yen [$1.2 billion].
An analysis of the capital raising conditions of REITs
shows that there have been repeated capital raisings
since November 2009, when a public offering was
conducted for the first time in 15 months. Most of
the capital that has been raised has been applied to
the acquisition of properties. January 2010 saw the
first issuance of investment corporation bonds in a
public offering in 20 months. The first, conducted by
Nippon Building Fund, raised 10 billion yen [$110
million] and was followed by four other REITs.
While there have been repeated acquisitions of largescale
properties, another feature of recent REITs is that
there has also been an increase in sales. In the January
to March 2010 period, there has been 91.2 billion yen
[$970 million] in sales. These include such REITs as
Invincible REIT, which sold 46 properties including
Growth Maison Ginza over several deals to raise 27.3
billion yen [$290 million] as a means to suppress
interest-bearing debt. However, there are also more
cases of REITs rebuilding their portfolios through
dynamic sales and acquisitions of assets. Japan
Retail Fund sold Urawa Parco for 26.1 billion
yen [$280 million] and used that money to acquire
seven properties in Tokyo and Osaka consisting of
retail facilities and plots of leased land under the
facilities. Their acquisitions totaled
approximately 24.4 billion yen
[$260 million]. ORIX JREIT
sold two office buildings in Tokyo
for a total of 13.1 billion yen [$140
million] and acquired six properties
consisting of logistics facilities and
retail buildings for a total of 31.5
billion yen [$340 million].
An analysis of the entire market
including non-REIT transactions
reveals that the number of deals
posted a year-on-year increase
following the October to December
2009 quarter. Figure 3 shows a
history of deals by property type
through year-on-year comparisons.
Hous i n g r ebounded f r o m i t s
preceding drastic slump to increase
by 153% and post deals roughly 2.5
times that of the same period a year
F igu r e 4 i s a l i s t o f m a j o r
transactions during the period.
Of the transactions for which the
prices are known, there were 12
transactions worth at least 10 billion
yen [$110 million] including bulk
sales. The most expensive property
was the former Mitsukoshi Ikebukuro
store, whose sale agreement was
concluded in September 2008 and
which was sold in January 2010
with all cash provided by home
appliance retailer Yamada Denki.
The second largest transaction was
the 45 billion yen [$480 million]
acquisition of the Aoyama Building
by a fund of Mitsubishi Jisho
Investment Advisors. The seller
was Mitsubishi Estate, which
registered a valuation loss on its
equity investments of 54.4 billion yen
[$580 million] due to the impairment
loss of Tokyo development sites and
other reasons in its settlement for the
March 2010 period. Nevertheless,
the company secured a profit for the
year by generating 22.9 billion yen
[$240 million] in profit through this deal. Nippon Oil bought 27% of the interest in the
Resona Maruha Building from Mitsubishi Estate for
42 billion yen [$450 million] and simultaneously sold
11.64% of the interest in GranTokyo South Tower for
40 billion yen [$430 million].
Figure 5 below takes the office buildings sold during
this quarter and the previous quarter for which the
price is known and indicates the sales price per square
meter of rentable floor space (unit price per square
meter). Figure 6 indicates the distribution of cap rates
estimated based on new closing rents and vacancies
using the weighted average by area.
In this case, the average unit price per square meter
for the five central wards of Tokyo is 1.95 million
yen [$21,000] and the cap rate is 3.7%. The average
unit price per m2 for Chiyoda Ward is high at 2.69
million yen [$29,000] and the cap rate is low at 3.2%.
These numbers were impacted by two large deals:
GranTokyo South Tower and the Resona Maruha
Building. An analysis of the cap rate distribution
shows that there are many cases in Chiyoda Ward and
Minato Ward where the cap rates are on the 3% to 4%
level and that the cases in Shinjuku Ward and Shibuya
Ward often surpass 5%.
Further, note that there are cases where the cap rates
differ from the actual returns since the cap rates
assume that vacant buildings are filled by tenants and view all buildings as solely office buildings, even when
a building contains retail stores and/or residential
Price of Ark Mori Building drops by 40%
Figure 7 indicates the cap rate of office buildings
transacted during this period in ascending order by
cap rate. Clearly, the highest unit price per square
meter was the 4.31 million yen [$46,000] registered
with the GranTokyo South Tower and the lowest cap
rate was 2.5% for the same transaction.
The next lowest cap rate was the Roppongi Hills
Mori Tower transaction in which Mori Hills REIT
acquired a portion of the tower from its sponsor
Mori Building. After the acquisition, Mori Hills
REIT is leasing the property to Mori Building at
a fixed rent. The cap rate calculated based on the
disclosed rental income is 4.1% but according to
our calculations, which take into consideration the
high vacancy rate in the area, the cap rate is 2.6%.
Similarly, the Ark Mori Building acquired by the
same REIT had a unit price per square meter of 2.43
million yen [$26,000]. The REIT also acquired part
of the same building in March and September 2008
and the respective unit prices per square meter at
those times were 4.15 million yen [$44,000] and 4.21
million yen [$45,000], respectively. This means that
the unit price in the past two years fell by around
the number of overall deals remains low and office
buildings transactions are rare. The JPR Nagoya
Sakae Building and NBF Hakata Gion Building were
both sold as a part of the process of REITs rebuilding
their portfolios. The price of the NBF Hakata Gion
Building fell by 16% compared to its acquisition in
2001. In Osaka City, the former Access Headquarters
Building and one other building sold for about 7
billion yen [$75 million], 30% of the price three years
In accordance with the increase in residential
transactions, the acquisition of condominium sites
particularly stood out during this period. Among
the noteworthy cases are the acquisition of entire
finished rental condominiums and conversion of them
into for-sale condominiums. Figure 8 shows the
deals for condominiums being subdivided and resold,
and Figure 9 indicates the deals for condominium
Four condominiums bought to be subdivided and
resold were acquired from the bankrupt Morimoto
and Eisen Realty. The buyers, Clearth Life and
Daiichi Realter, are focusing on this business of
acquiring condominiums whose entire buildings are
sold and subdividing them for resale. Meanwhile,
Confort Yotsuya and Fabian are properties that were
built several years ago. These will be subdivided and
sold after renovations.
Wednesday, September 29, 2010
Tokyo is proving particularly popular with apartments among the best selling classes of real estate at present, according to experts. But other sectors are also seeing increased sales.
‘Hotels, Tokyo offices, Tokyo residential, I would say, will be the three specific sectors and opportunities that are being most sought after by international investors,’ said Alistair Meadows, Asia Pacific director for International Capital Group at global property services firm Jones Lang LaSalle.
Buyers who have already declared their interest include Mapletree Investments, the real estate arm of Singapore’s state investor Temasek Holdings , with close to $1 billion in new cash earmarked for office buildings, data centers and research and development facilities.
Also looking are American private equity firms Blackstone Group and Fortress, Germany’s Deutsche Bank and US based Jones Lang LaSalle’s funds arm LaSalle Investment.
Franklin Templeton is understood to be looking to buy a portfolio of distressed loans at a discount, which would provide attractive returns and allow access to physical assets, while Blackstone plans to buy Morgan Stanley ’s loans which are backed by commercial real estate such as office buildings.
Wealthy Chinese investors are also increasingly looking to Japan and a number of travel agencies have started offering Buy Japanese Property tours. Realtors say major foreign private equity groups, real estate trusts and realtors have earmarked an estimated $6.6 billion for investments in Asia, showing interest in Japan’s bricks and mortar assets and property debt.
‘While we are cautious around the country’s fundamentals, we do believe that the sheer size of the market allows for opportunities,’ said Peter Kim, managing director, ING Real Estate Investment Management, which has funds invested in Japan.
A bottoming out of real estate prices and a recovery in the debt market are some positives investors are buying into. In a clear indication that office buildings values are set to grow, cap rates, the income that the property will generate divided by its value, have stopped rising.
‘We reiterate our view that cap rates will decline in the second half of 2010 and that real estate prices are very likely to rebound,’ Barclays Capital said in a recent report note.
Distressed or marked down properties in Japan, such as debt backed by commercial real estate, are also emerging on the radars of foreign buyers. ‘We are finding a degree of success in finding deals through trust banks or lenders who have taken control of over leveraged assets,’ said Jacques Gordon, global investment strategist at LaSalle Investment Management.
As foreign money pours in, the real surge in buying may just be starting, according to Mark Brown, a real estate analyst at researcher Japaninvest. The gap between what distressed property owners are asking and the amount buyers are willing to pay is closing fast, he said, adding that would lead to plenty of new deals.
Tokio Marine Capital Co., the private-equity arm of the insurer, aims to raise about 15 billion yen this year and reach its target by the end of 2011, said Hideaki Fukazawa, the president of the Tokyo-based unit. It plans to start investing as early as next year, he said.
The buyout fund will be the fourth offered by Tokio Marine Capital as firms recover from a 57 percent plunge in the value of global private-equity fundraising that peaked three years ago. Fukazawa aims to invest in mid-cap Japanese companies with 5 billion yen to 50 billion yen in annual sales, he said.
“We’re finally starting to see some recovery in the private-equity market here,” Fukazawa, 54, said in an interview in Tokyo on Sept. 17. “Japanese mid-sized companies have great technology with ample potential.”
Tokio Marine Capital, founded in 1991, has approached Japanese institutional investors who have invested in its previous funds including major banks, insurers and foreign public pension funds and sovereign wealth funds, he said.
Funds globally raised $281 billion last year, dropping from the record $646 billion collected in 2007, according to London- based researcher Preqin Ltd.
Private-equity firms pool money from investors to take over companies using a mix of cash and debt with the intention of selling them at a profit. Recent Japan private-equity deals include Kohlberg Kravis Roberts & Co.’s agreement in June to buy Usen Corp.’s human resources business -- its first in the nation.
The new fund will target “niche, top players” in their respective markets because it makes it easier to find buyers when the time comes to exit the investments, Fukazawa said. Tokio Marine Capital will also offer an off-shore parallel fund in conjunction with the new fund, allowing overseas investors to participate without the tax burden, Fukazawa said.
Tokio Marine Capital’s previous investments include Showa Yakuhin Kako Co., the maker of Acetaminophen-based pain reliever Calonal; Bushu Pharmaceuticals Ltd., which provides manufacturing and packaging services for global drugmakers; and Barneys Japan Ltd., an apparel and accessories retailer.
“Going forward, we’ll be interested in businesses involved with child care, health care and fashion including general manufacturers,” said Fukazawa.
Tokio Marine Capital’s first and second funds produced internal rates of returns of about 25 percent.
Goldman Sachs has given up ownership of one of its most high-profile investments in Japan – the Tiffany Building in Tokyo’s Ginza neighbourhood – in a move that highlights the problems facing many foreign investors who acquired real estate in Japan before the global financial crisis.
Goldman, whose real estate fund acquired the building from Tiffany’s in early 2007 for Y38bn ($454m), exited the investment when the loans came due earlier this year, according to several people close to the situation.
As a result, the Goldman fund will have lost its entire equity investment, believed to be about Y7.6bn. The bankers to the deal, most of them foreign banks, are now in control of the sale process, these people said. Goldman declined to comment.
The decision by Goldman to walk away from the Tiffany Building, which is believed to have more than halved in value in the past three years, highlights the difficulties faced by investors who bought Japanese real estate at what are now seen to be peak prices in 2007 and 2008 – and their bankers.
Japan is not alone in suffering a real estate slump.
However, real estate loans in Japan typically come due in three years, so investors in the country are facing repayment earlier than in other markets.
Goldman and Morgan Stanley, which have been investing in Japanese real estate since the country’s asset bubble burst in the late 1990s, are among foreign investors who made some of the most high-profile property investments in recent years.
These include Morgan Stanley’s investments, through real estate funds, in a portfolio including 13 hotels acquired from ANA for Y281.3bn in 2007. It also acquired Shinsei Bank’s headquarters building for Y118bn in 2008 and Citigroup’s building in Tennozu Isle for Y48bn.
The Tiffany Building, designed by Japanese architect Kengo Kuma, was Goldman’s most eye-catching acquisition, not only because of the name of the tenant, but also due to its high unit price.
“That was a new high watermark for low-yielding real estate investments in Japan,” says one industry official, citing a yield believed to be just over 2 per cent.
Morgan Stanley’s real estate fund won a reprieve on its loan repayment after it agreed with creditors, including GIC, Singapore’s sovereign wealth fund, on a restructuring of the financing, according to a person close to the deal.
However, another fund managed by Morgan Stanley will soon face repayment of funds borrowed when it acquired Shinsei Bank’s headquarters building, in Tokyo’s Hibiya district.
While the building is in a prime location, Shinsei Bank, which occupies the building, is set to move out within months, leaving the owner without a stable tenant.
After viewing almost 100 Tokyo apartments, banker Damien Cambon was happy to discover that a Japanese tradition dating back more than a century is dying: the payment of up to two months’ rent extra as a gift to the landlord.
“Reikin,” or “gift money,” a non-refundable fee on top of a deposit and any broker fees that has helped boost landlords’ earnings since at least 1897, is the latest victim of a slump in the market in the world’s second-most expensive city. Rents in Tokyo’s five central wards fell to an average 4,165 yen per square meter in June, the lowest since the Japan Real Estate Institute started tracking prices in 1998.
“My broker would say, ‘forget about the gift money,’ and the landlords would all say, ‘OK,’” said Cambon, 29, who works for a U.S.-based bank he declined to name. “This was a very good surprise.”
As Prime Minister Naoto Kan considers injecting as much as 4.6 trillion yen ($55 billion) into the economy to create jobs, boost consumption and stem 12 years of deflation, Tokyo landlords are also trying to stimulate the rental market by scrapping reikin and waiving as much as five months’ rent for new leases.
“The rental property business is changing,” said Yoshiya Watanabe, a real estate agent at Atland co. in Tokyo. “If you eliminate reikin, you get better turnaround” for vacant units.
While landlords of luxury Tokyo apartments rented for 500,000 yen or more have waived reikin in the past, as many as 65 percent of units below that tier now don’t require gift money, compared with about 25 percent two years ago, Watanabe said.
Cambon said his previous landlord lowered his rent 13 percent at the end of his two-year lease and waived the contract renewal fee of one-month rent. Even so, he opted for a new apartment with a terrace and rooftop access.
The September 2008 bankruptcy of Lehman Brothers Holdings Inc. and the recession that followed prompted a drop in occupancy rates, said Hirotaka Uruma, chief financial officer at Daiwa House Morimoto Asset Management Co. The company oversees BLife Investment Corp., a residential real-estate investment trust that manages 8,116 apartments in Tokyo.
“Waiving reikin has become the norm,” he said. “When your competitors are also waiving it, it doesn’t make sense for us to keep demanding it.”
BLife’s residential occupancy rates in Tokyo’s five central wards dropped to 85 percent in November from 94 percent a year earlier, he said. In the same period, gift-money income as a proportion of total revenue for BLife dropped to 0.3 percent from 1.65 percent, Uruma said.
‘Doesn’t Make Sense’
“In the long run, reikin will completely disappear because this is a system that doesn’t make sense,” said Yoji Otani, a real estate analyst at Deutsche Bank AG in Tokyo. Eliminating the fee “will make it easier for tenants to move around, which is good for brokerage companies, but bad for residential REITs.”
Gift money dates back to as early as 1897 when it was documented in a contract for a property in Tokyo’s Chiyoda ward, according to “Japan’s Rental Property (1995),” a book by Nobuhisa Segawa, a law professor at Hokkaido University. The practice originated to offset rising land prices while ensuring rents for new tenants weren’t substantially different from what their neighbors were paying, according to Segawa. Reikin income is typically split between the broker and owner.
Landlords who are holding on to the practice, also known as “key money,” include those who have inherited their property and are less concerned about vacancy, Watanabe said.
Not in New York
Demanding key money is illegal in New York, according to the New York City Rent Guidelines Board. The practice is no longer prohibited in England, though landlords typically don’t charge a “premium,” which gives tenants the right to assign tenancy to a third party, according to Tessa Shepperson, a lawyer in Norwich.
Tokyo Governor Shintaro Ishihara said in a 2004 policy statement that reikin as well as contract renewal fees should be eliminated. While the city’s position has not changed, it can’t legally force landlords to abolish the fee, said Kazuo Onoda, who works on the city’s efforts to improve housing policies. The decline of reikin “is a result of market forces,” he said.
Even after Japan’s land prices tumbled the most in 13 years in 2009, Tokyo is still the second-most expensive city in the world for expatriates behind Luanda, Angola, based on Mercer LLC’s Cost of Living Survey released in June that compares housing, food, gasoline, movie and other prices. Rent for a mid- range two-bedroom unfurnished apartment in Japan’s capital averaged $4,436 a month, compared with $3,906 in London and $4,000 in New York, according to the study.
Some landlords say reikin payments may return once Japan’s property market recovers.
“At the moment, new supply is very limited,” said Atsushi Ogata, chief executive officer of Nomura Real Estate Asset Management Co. which manages a residential and an office REIT. “In a couple of years, we may face another good market, with demand outpacing supply, in which case we can probably charge as much reikin as before.”
Total gift-money income dropped by about half on average in March and April, when the majority of new tenants move in, from a year earlier, Ogata said.
Meanwhile, it’s a tenants’ market in Tokyo, as rent has dropped by as much as 15 percent since 2007, said Mikihisa Hirai, president of Tokyo-based Atlas Partners Japan Ltd., which owns more than 2,000 apartments in Nagoya, Osaka and Tokyo.
“In order to attract new tenants, owners would rather forget the gift money, especially when properties are owned by funds,” he said. “Investors can no longer count on reikin.”
Prudential, which entered Japan in 1987, is set to buy AIG’s Star Life Insurance and Edison Life Insurance units for $4.8 billion, three people with knowledge of the matter said yesterday. MetLife expects to complete a $15.5 billion deal for American Life Insurance Co., known as Alico, on Nov. 1. Both firms sidestepped the worst of the financial crisis and are expanding in the world’s second-largest life-insurance market as bailed-out rivals retreat.
Prudential’s John Strangfeld is making his second deal in Japan since taking over as chief executive officer in 2008. He’s building a business in a nation that already contributes more than a fifth of Prudential’s revenue. MetLife CEO Robert Henrikson is adding Alico’s more than $7 billion of annual revenue in Japan to a non-U.S. business that reported $5.5 billion of revenue in 2009.
“Met is probably making a riskier acquisition, but there’s a bigger payoff,” said Randy Binner, an analyst who follows U.S. insurers for FBR Capital Markets and has “outperform” ratings on MetLife and Prudential. “Pru would not expect to have that same kind of home run or multiple or expansion. But they’re much more likely to execute it well.”
Prudential, the second-biggest U.S. life insurer, will pay for the AIG units in cash, said the people, who declined to be identified because the negotiations are private.
Prudential will pay about book value, a measure of assets minus liabilities, for Star and Edison, according a valuation of the businesses in AIG’s second-quarter report. MetLife is paying about 1.2 times book value for Alico, according to the $12.8 billion valuation for the unit given by AIG in August.
Strangfeld is spending capital that Newark, New Jersey- based Prudential accumulated after the 2008 credit crunch interrupted insurers’ traditional sources of funding. Prudential slashed its dividend two years ago and in 2009 sold a stake in a securities brokerage for $4.5 billion. As the crisis eased last year, Strangfeld, 56, also sold equity and debt.
Henrikson, 63, sold stock in 2008 and agreed to MetLife’s biggest deal in March to grow beyond a U.S. life insurance market that he described this year as “relatively slow- growth.” MetLife, the biggest U.S. life insurer, is picking up Alico’s businesses from Argentina to Russia to Qatar, including the Japan operation that Chief Financial Officer William Wheeler called a “cash machine.”
MetLife entered Japan, Australia and the U.K. with the $11.7 billion purchase of Travelers Life & Annuity from Citigroup Inc. in 2005. After the Alico deal, New York-based MetLife will get about half its non-U.S. earnings from Japan, Suneet Kamath, an analyst with Sanford C. Bernstein & Co., said in a Sept. 22 research note. Alico got $7.8 billion of its revenue from Japan in the 12 months ended Nov. 30, or about 55 percent of its total, MetLife said in an August filing.
Japan accounted for about 17 percent of the world’s life insurance sales last year, according to a study by Swiss Reinsurance Co. Premium volume was $399 billion in 2009, down 0.8 percent when adjusted for inflation, Swiss Re said. In the U.S., the world’s biggest market, premiums dropped 15 percent to $492 billion, according to the Zurich-based reinsurer.
“The outlook for the Japanese life-insurance market remains gloomy, as both household income and employment will stagnate in 2010,” Swiss Re said in the report.
Prudential’s Japan Deals
Earnings from Star and Edison haven’t grown in recent years, Kamath of Sanford C. Bernstein said. Prudential bought bankrupt carrier Yamato Life Insurance Co. last year after winning an auction for the Tokyo-based firm. Prudential acquired a failed Japanese carrier in 2001 and renamed it Gibraltar Life Insurance Co.
“Pru has been able to generate strong growth from Gibraltar through improvements in agent quality, new products and its affiliated and new distribution channels,” Kamath said in the report. “As such, we feel Pru will look for similar opportunities” with Star and Edison, Kamath said.
Prudential’s premiums, policy charges and fee income from Gibraltar and other Japanese operations rose 21 percent to $6.99 billion last year. Prudential posted total 2009 revenue of $32.69 billion.
Gibraltar and Prudential’s original unit, known as Prudential of Japan or POJ, operate separately. As of June 30, the two subsidiaries had about $73 billion in assets, according to a Prudential investors’ presentation on Sept. 14 in Tokyo.
Henrikson and Strangfeld shunned government bailouts last year, while rivals Hartford Financial Services Group Inc. and Lincoln National Corp. took U.S. capital injections. Hartford, based in the Connecticut city of the same name, was hurt by investment declines and retreated from Japanese and European markets to concentrate on U.S. operations. Philadelphia-based Lincoln sold a U.K. unit and an asset manager.
AIG, once the world’s biggest insurer, is divesting businesses to repay a $182.3 billion U.S. rescue. The Alico deal was valued by MetLife at $16.1 billion in August after the market price of its securities rose.
AIG agreed to hold about $3 billion in MetLife securities from the deal in escrow to indemnify the buyer from costs tied to Alico. The funds could shield MetLife from losses on Alico’s Japanese commercial real estate holdings. AIG also agreed to indemnify MetLife for legal claims and regulatory fines tied to European funds in which client withdrawals were suspended.
Aetos Capital, an investment management firm, plans to raise $1 billion for a fourth real estate fund to buy office buildings and condominiums in Japan and China, a person with direct knowledge of the matter said.
Aetos Capital plans to raise the money by December and has already gathered $250 million from investors, the person said, on condition he was not identified.
Aetos joins other big real estate buyers starting funds to purchase properties in Japan on the expectation that falling real estate values will rebound.
Price declines are slowing, according to the Japan Real Estate Institute. At the end of March commercial property values in central Tokyo had contracted by only 2.4 percent from six months earlier, compared with a 6.5 percent drop over a year, the research company said.
Fortress Investment Group (FIG.N) set up an $800 million Japan fund in June, while Morgan Stanley (MS.N) in the same month established a $4.7 billion pool of cash to buy properties around the world, including Japan.
Scott Kelley, Aetos Capital Asia LLC's chief executive, declined to comment on the latest fund raising.
MISASA, Japan — A plan by Chinese real estate developers to invest in this little mountain town has opened a window onto a Japanese crisis of confidence.
For locals here, the planned development — vacation homes for rich Chinese — is a welcome infusion of capital into a town that has been in decline since its heyday in the 1980s as a hot spring resort.
But seen from elsewhere in Japan — there have been news accounts in the national media, not all of them accurate — the investment is a menace to the area’s pristine forests and streams, a land grab that threatens the country’s natural resources and a chilling reminder of the expanding shadow cast by China, which recently surpassed Japan to become the world’s second-largest economy after the United States.
“Targeted by Foreign Money? Japan’s Forests for Sale,” was the warning title of a news program this month by the public broadcaster, NHK.
A fear that “China money” is buying up the Japanese homeland is spreading across this nation, fanned by news reports and a general anxiety over Tokyo’s fading economic prowess and an increasingly hostile wealthy neighbor. The amount of money invested is still small by China’s standards, but seems to be setting off an outsize reaction among the Japanese.
Tokyo’s recent retreat from the diplomatic face-off over the arrest of a Chinese trawler captain, and China’s suspension of shipments of vital industrial metals and minerals to Japan, have also put many Japanese on edge.
“I’m all for closer ties with China, but we need to be on our guard,” said Hideki Hirano, author of the book “Japan’s Forests Under Siege: How Foreign Capital Threatens Our Water Source,” which was published in March. “We need to be more vigilant about who’s buying what.”
Here in Misasa, however, nationalist rhetoric is often tempered by pragmatism.
“Rich Chinese spend money in ways that no longer exist in Japan,” said Kiyomi Kawakami, a local developer who plans to build 47 luxury homes in Misasa with partners from Shanghai.
“People warn me not to sell land to the Chinese,” he said. “But I run a business. If somebody’s buying, I’m selling.”
Whether in far-flung corners of Japan like Misasa or in corporate boardrooms, there is a realization that as the Chinese economy booms, Japan needs — even as it remains wary of — China’s money.
The sentiment is reminiscent of the way Americans feared Japanese economic imperialism in the 1980s, alarmed by the acquisition of United States icons like Rockefeller Center by Mitsubishi and Columbia Pictures by Sony.
Chinese companies spent $120 million in the first half of this year to acquire various small and midsize Japanese enterprises, taking advantage of depressed asset prices, according to a recent report from Goldman Sachs. The figure represents a sixfold increase from the comparable period last year. China is also now Japan’s biggest trading partner, with overall trade surging by a third, to 12.6 trillion yen ($151 billion) in the first half of the year, compared with the same period last year.
“We shouldn’t think it a bad thing that foreign investors are recognizing value in Japan,” said Kazuhiko Masumoto, an analyst at the Mitsubishi Research Institute in Tokyo.
But Japan’s finance ministry has seemed slow to agree.
This month, Japan’s finance minister, Yoshihiko Noda, asked Chinese policy makers to “clarify their objectives” after recent bulk purchases of Japanese government bonds. Tokyo was concerned that the buying was helping to drive up the yen’s value — making Japan’s exports less competitive with China’s.
Bowing to economic realities, and Japan’s already high levels of public debt, Finance Ministry officials have since then played down the conflict, saying Japan was happy to find foreign takers of its government bonds.
Until the trawler dispute prompted some tour groups to at least temporarily cancel trips to Japan, waves of newly rich Chinese tourists, with pocketbooks open, had been welcomed in Japan — even while heightening a sense that the country is at the mercy of rich Chinese.
Reports of Chinese snapping up Japan’s mountains and forests have struck a raw nerve, however. Although Japan is known for its big cities, about 70 percent of its landmass is mountainous forest, and the purchases raise the specter of China’s gaining control of the cherished hinterlands.
Japan’s logging industry is in decline, as the country has been flooded with cheap imported timber. As a result, forest real estate now sells for rock-bottom prices, and many plots have been abandoned by absentee or aged owners and have fallen into a state of neglect.
In January, the Tokyo Foundation, a respected independent research organization where Mr. Hirano, the author, is an analyst, issued a widely read report warning that foreign brokers could extract natural resources like timber and water and threaten Japan’s national security.
“If we wait until the exploitation of Japan’s natural resources by global interests is well under way,” the report said, “it may be too late.”
GreenOak Real Estate, an investment firm started by former Morgan Stanley executives, is seeking $800 million to buy properties and loans in Japan, where prices have fallen for 19 straight years, according to two people with knowledge of the plans.
GreenOak plans to begin investing by the first quarter, according to the people, who asked not to be identified because the information is private. Fred Schmidt, a GreenOak co-founder in Tokyo, declined to comment.
Land values in Japan, which have declined by about half since the peak in 1991, are starting to attract investors, as has the prospect of acquiring properties put up for sale by owners needing to pay off loans. Tokio Marine Property Investment Management Inc., a Tokyo-based unit of Japan’s largest casualty insurer, said earlier this month it plans to raise 50 billion yen ($598 million) to buy rental apartments in the capital in a bet that prices are near the bottom.
Average land prices dropped 3.7 percent in the 12 months ended June, compared with a 4.4 percent decline a year earlier, according to a Sept. 22 report by the Ministry of Land, Infrastructure, Transport and Tourism. About 1.23 trillion yen of commercial real estate-backed mortgages are due this year, according to an estimate by Credit Suisse Securities (Japan) Ltd.
GreenOak was established by Sonny Kalsi, former global head of New York-based Morgan Stanley Real Estate; John Carrafiell, who had been co-head of the unit; and Schmidt, who previously led Morgan Stanley’s property division in Japan.
Investors from the United States to tiny land-hungry Singapore are on the hunt for real estate in Japan, with over USD 2 billion in deals already cemented since late last year and more in the offing.
In the buyers' sights are a thick catalogue of properties, many of them in Tokyo, a city populated by thousands of office buildings and condominiums.
"Hotels, Tokyo offices, Tokyo residential, I would say, will be the three specific sectors and opportunities that are being most sought after by international investors," said Alistair Meadows, Asia Pacific director for International Capital Group at global property services firm Jones Lang LaSalle.
Buyers who have already declared their interest include Mapletree Investments, the real estate arm of Singapore's state investor Temasek Holdings, with close to USD 1 billion in new cash earmarked for office buildings, data centres and research and development facilities.
Joining Mapletree in the rush are American private equity firms Blackstone Group and Fortress, Germany's Deutsche Bank and US-based Jones Lang LaSalle's funds arm LaSalle Investment.
Franklin Templeton is looking to buy a portfolio of distressed loans at a discount, which would provide attractive returns and allow access to physical assets, while Blackstone plans to buy Morgan Stanley's loans, which are backed by commercial real estate such as office buildings.
Taiwanese real estate broker Sinyi Realty set up operations in Tokyo a few months ago. And for wealthy Chinese, travel agencies have even started offering "Buy Japanese Property" tours.
Realtors say major foreign private equity groups, real estate trusts and realtors have earmarked an estimated USD 6.6 billion for investments in Asia, showing interest in Japan's bricks and mortar assets and property debt.
"While we are cautious around the country's fundamentals, we do believe that the sheer size of the market allows for opportunities," said Peter Kim, Managing Director, ING Real Estate Investment Management, which has funds invested in Japan.
A bottoming out of real estate prices and a recovery in the debt market are some positives investors are buying into.
Marquee deals already done include a Hong Kong investor's buy of the Hyatt Regency hotel in Hakone from Morgan Stanley for an estimated $56 million.
Malaysian investor YTL Corporation also inked a deal in March to buy Hilton Niseko Village for about USD 48.3 million, marking a major investment in a Japan's well-known ski resort in Hokkaido.
In a clear indication that office buildings values are set to grow, cap rates -- the income that the property will generate divided by its value â€“ have stopped rising.
"We reiterate our view that cap rates will decline in the second half of 2010 and that real estate prices are very likely to rebound," Barclays Capital said in late August.
Distressed or marked-down properties in Japan, such as debt backed by commercial real estate, are also emerging on the radars of foreign buyers.
"We are finding a degree of success in finding deals through trust banks or lenders who have taken control of over-leveraged assets," said Jacques Gordon, global investment strategist at LaSalle Investment Management.
As foreign money pours in, the real surge in buying may just be starting, predicts Mark Brown, a real estate analyst at researcher Japaninvest.
The gap between what distressed property owners are asking and the amount buyers are willing to pay is closing fast, he notes, adding that would lead to plenty of new deals.